Better buy: Lloyds Banking Group plc vs Barclays plc

Updated: 
Barclays Bank and Lloyds Bank signs

British banks Lloyds (LSE: LLOY) and Barclays (LSE: BARC) have seen their share prices rise recently on the back of Donald Trump's US election win. But which offers the best investment opportunity?

Earnings

A glance at the two banks'  income statements reveals that in recent years, Lloyds has had more earnings momentum than rival Barclays. Lloyds has generated earnings growth of 29% over the last three financial years, reporting adjusted earnings per share (EPS) of 6.6p, 8.1p and 8.5p for FY2013-2015. Barclays has seen more modest growth of 9% in this time, reporting earnings of 15.3p, 17.3p and 16.6p.

City analysts forecast consecutive earnings declines for Lloyds, with FY2016-2017 earnings of 7.2p (-18%) and 6.6p (-9%) estimated. By contrast, earnings at Barclays are predicted to fall and then rise, with 11.4p (-46%) and 18.7p (+39%) forecast. 

Is there a definitive winner here? It's a tough call. With Lloyds generating 100% of its income in the UK compared to 48% for Barclays, much is likely to depend on how Brexit affects the UK economy and the implications this has for the financial sector. 

Dividends

However, when it comes to dividends, it's easier to pick a winner. There's no doubt Barclays trumped Lloyds in recent years in terms of dividend consistency, paying out 6.5p per share each year for FY2013-2015, compared to Lloyds' 0.00p, 0.75p and 2.75p in this time.

However looking forward it's a different story as Barclays announced earlier this year that it would be cutting its dividend for FY2016. Barclays is now forecast to pay just 3p this year and next year, which on the current share price, equates to a yield of just 1.4%.

But Lloyds is forecast to pay 3.16p this year and 3.7p next year, yields of 5.4% and 6.3% respectively, and the bank has reiterated its commitment to a progressive and sustainable ordinary dividend. Lloyds clearly has the momentum here, and while the bank's future dividend payouts are certainly not guaranteed, I believe that Lloyds has the brighter dividend prospects in the near term. 

Price

Lloyds' shares fell heavily after the Brexit result and are down 19% year-to-date. With analysts forecasting EPS of 7.2p for FY2016,  the bank trades on a forward looking P/E multiple of 8.2.

Barclays shares are down just 4% for the year now and at the current share price of 210p, the bank trades on a forward looking P/E ratio of 18.4. On this metric, Lloyds appears to be the cheaper stock.

Which stock would I buy?

One thing that appeals to me about Lloyds is the bank's simplified business model. It focuses on domestic retail and small business banking and is 100% UK-focused. Its cost-to-income ratio is low at 47.5% and the bank recently reported a strong Common Equity Tier 1 capital (CET1) of 13.4%.

Barclays has a more complex business model, including an investment banking arm and more diverse geographic exposure. Many of its 'non-core' assets have underperformed of late, and as a result, the bank is looking to dispose of non-core holdings and simplify its group structure. Barclays recently reported a cost-to-income ratio of 79% for Q3, and a CET1 ratio of 11.6%.

There are still many risks facing the banking sector, however if I had to choose between Lloyds and Barclays, I would pick Lloyds on the back of its low price multiple, simplified structure and exciting dividend prospects.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.